Completing the Accounting Cycle

Chapter 4

Wild and Shaw

Fundamental Accounting Principles
24th Edition

1
 Chapter 4 Learning Objectives
CONCEPTUAL
C1 Explain why temporary accounts are closed each period.
C2 Identify steps in the accounting cycle.
C3 Explain and prepare a classified balance sheet.

PROCEDURAL
P1 Describe and prepare closing entries.
P2 Explain and prepare a post-closing trial balance.
 Learning Objective C1

Explain why temporary

accounts are closed each
period.

© McGraw-Hill Education 3
 4-4

Temporary and
Permanent Accounts
Revenues Assets

Withdrawals

Liabilities
Expenses

Owner’s
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The closing process
applies only to
temporary accounts.
© McGraw-Hill Education 4
Learning Objective C1: Explain why temporary accounts are closed each period.
 4-5

Closing Process
1. Resets revenue,
expense, and Identify accounts
withdrawal account for closing.
balances to zero at
the end of the period.
Record and post
2. Helps summarize a closing entries.
period’s revenues and
expenses in the
Income Summary Prepare post-closing
account. trial balance.

© McGraw-Hill Education 5
Learning Objective C1: Explain why temporary accounts are closed each period.
 Learning Objective P2

Describe and prepare closing

entries.
 4-7

Recording Closing Entries

1. Close Credit Balances in Revenue Accounts to
Income Summary.
2. Close Debit Balances in Expense accounts to
Income Summary.
3. Close Income Summary account to Owner’s
Capital.
4. Close Withdrawals to Owner’s Capital.

Learning Objective P2: Describe and prepare closing entries.

 4-8

Recording Closing Entries (continued)

Exhibit
4.3

Learning Objective P2: Describe and prepare closing entries.

 Learning Objective P3

Explain and prepare a post-

closing trial balance.
 Post-Closing Trial Balance
▪ List of permanent
accounts and their
balances after posting
closing entries.

▪ Total debits and credits

must be equal.

Learning Objective P3: Explain and prepare a post-closing trial balance.

 Post-Closing Trial Balance (continued)
Exhibit
4.6

Learning Objective P3: Explain and prepare a post-closing trial balance.

 Learning Objective C2

Identify steps in the accounting

cycle.
 4 - 13

Accounting Cycle Exhibit

4.7

Learning Objective C2: Identify steps in the accounting cycle.

 Learning Objective C3

Explain and prepare a

classified balance sheet.
 4 - 15

Classified Balance Sheet

Exhibit
4.8

Current items are expected to come due (collected and

owed) within the longer of one year or the company’s
normal operating cycle.
Most operating cycles are less than one year, so most
companies use a one year period in deciding what assets
and liabilities are current.
Learning Objective C3: Explain and prepare a classified balance sheet.
 4 - 16

Classified Balance Sheet Example

Exhibit
4.9

Learning Objective C3: Explain and prepare a classified balance sheet.

 4 - 17

Current Assets
Current assets are expected to be sold,
collected, or used within one year or the
company’s operating cycle.

Learning Objective C3: Explain and prepare a classified balance sheet.

 4 - 18

Long-Term Investments

Long-term investments are expected to be held for

more than one year or the operating cycle.

Learning Objective C3: Explain and prepare a classified balance sheet.

 4 - 19

Plant Assets

Plant assets are tangible long-lived assets used to

produce or sell products and services.

Learning Objective C3: Explain and prepare a classified balance sheet.

 4 - 20

Intangible Assets

Intangible assets are long-term assets used to

produce or sell products and services and that
lack physical form.

Learning Objective C3: Explain and prepare a classified balance sheet.

 4 - 21

Current Liabilities

Current liabilities are liabilities due within the longer of

one year or the company’s operating cycle.

Learning Objective C3: Explain and prepare a classified balance sheet.

 4 - 22

Long-Term Liabilities

Long-term liabilities are liabilities not due within the

longer of one year or the company’s operating cycle.

Learning Objective C3: Explain and prepare a classified balance sheet.

 4 - 23

Equity

Equity is the owner’s claim on the assets.

Learning Objective C3: Explain and prepare a classified balance sheet.

 4 - 24

End of Chapter 4